North American Private Sector Pension Funds in Hedge Funds

by Amy Bensted

  • 27 Jul 2009
  • HF

North American private sector pension funds are relative newcomers to the hedge fund asset class with most pension funds having been active in within the hedge fund industry for an average of two years. Private sector pension funds are a key source of capital for hedge fund managers with their average target allocations (11.6%) out-stripping current commitments (8.0%) by a sizeable margin. The vast majority of these pension funds still invest locally, with relatively few identifying Europe and emerging markets as preferred investment locations. However, a substantial and increasing proportion do search for new global investments. The majority of this global exposure likely comes through funds of hedge funds. This is to allow exposure to a wide-range of hedge fund strategies, without the need for similarly wide-ranging in-house expertise. Where they have deviated from a funds of hedge funds approach, private sector pension funds have largely stuck with more risk-averse hedge fund strategies.

It is worth noting, however, that some larger funds are now investing in distressed debt strategies, to try to take advantage of opportunities created out of the economic downturn. It is likely that, as a class, private sector pension funds will follow the pattern of other investor classes, and gradually increase both the size and diversity of their hedge fund portfolios as they grow more experienced at investing in the asset class. Furthermore, North American private sector pension funds constitute 14.8% of all investors considering a maiden investment in hedge funds on Preqin’s database. With the widespread redemptions by high-net-worth individuals impacting upon manager capital, the unfilled allocations and potential for new investors within this asset class should see strong growth in the importance of private sector pension funds in the hedge fund investment landscape.

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